The market is underestimating this stock's profitability

Life360 (ASX: 360) is a market-leading family safety and communication application. The app’s core features include location sharing, driving safety services, digital safety, and emergency assistance. Life360 also offers insurance that covers roadside assistance, travel, and identity theft. The application integrates tools to enhance the safety of all family members and provides parents with peace of mind that their loved ones are safe. Life360 is the 32nd most downloaded app in the USA!

Life360 utilises a freemium model allowing users to access core features. A freemium model and positive word-of-mouth are key to Life360’s low customer acquisition cost. Life360 monetises the user base by upselling app users to member subscriptions that offer a broader range of features. Over 50% of earnings are generated from subscription sales. Three membership tiers are available in the USA and Canada, but only one paid membership option is currently available in other international markets.

Just over twelve months ago, Life360 acquired Jiobit and Tile. The company now delivers a one-stop shop for location tracking solutions across people, pets, and things. Tile, used to track things, has been integrated into the Life360 app, strengthening the customer value proposition, and driving broader uptake of paid subscription tiers.

Repricing

In the second half of 2022, Life360 put through a 50% price rise across existing and new US-based iOS subscribers. Subscriber retention after the price rise was better than management had anticipated. A 40% uplift in average revenue per user more than offset lower customer retention, demonstrating Life360’s pricing power and the value users place on family safety.

Life360 has returned to growth in net subscriber additions. At the upcoming June quarter, Life360 will similarly reprice Android users, which account for 25% of total subscribers.

Turning cashflow positive

Management guidance suggests Life360 will be cashflow positive by the 2023 June quarter. Reaching positive free

cashflow will be a key catalyst for increased investor conviction in Life360’s business model. Management are focused on maintaining financial discipline to deliver expanding margins as the business adds paying users. For example, the company has implemented a reorganisation of headcount and restrained hiring which will deliver US$15 million annualised savings. Platform commission costs are also expected to reduce overtime, which will deliver further margin expansion.

Life360 have recently established a dedicated international management team based in the UK, which will provide a beachhead for growth outside North America. In the second half of 2023, Life360 will launch the three membership tiers in the UK, followed by major European markets in 2024. The key European markets have a similar market size to North America, providing another engine to grow paying subscribers.

We believe Life360’s medium-term profitability is being underestimated by the market. Our conviction has increased following the repricing initiatives, greater cost control, commission savings, and progress on international expansion. Life360 currently trades on 1.5x EV/Sales multiple versus peers on 4x.

Duolingo

Duolingo (NASDAQ: DUOL), a US-based language learning application has a similar business model to Life360 and is running 12-months ahead in terms of its growth trajectory. Below, we explore the insights Duolingo can provide on Life360’s future earnings potential.

Like Life360, Duolingo offers a freemium model. Most of Duolingo’s revenue is derived from subscription services.

However, unlike Life360, the company also earns marketing revenue from in-app advertising. Duolingo’s market capitalisation is 7x that of Life360’s. Duolingo’s FY22 revenue is US$370 million and adjusted EBITDA is US$15 million.

By overlaying key Life360 operating metrics such as market penetration, profitability, monthly active users (MAU’s), average revenue per user, and US subscription revenue growth with that of Duolingo’s, we can see that the two companies appear to be on a similar growth trajectory, albeit with Life360 lagging by roughly 12-months.

Comparing Life360 and Duolingo’s key operating metrics gives us greater conviction that Life360’s medium term targets are achievable. If the company delivers on these targets, the share price has the potential to materially re-rate versus current levels.

Want more market analysis like this?

We hope you enjoyed this wire. If you want to read more market analysis from the team at Firetrail Investments, click the 'FOLLOW' button below. 

Managed Fund

Firetrail Australian Small Companies Fund

Australian Shares

View